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Microeconomics Quiz5

Chapter 10, 11, 16, 12, and 13

Question	Answer
Externality	The uncompensated impact of one person’s actions on the well-being of a bystander
If the impact on the bystander is adverse, we say that there is a _ externality.	negative
If the impact on the bystander is beneficial, we say that there is a _ externality.	positive
In either a beneficial or adverse situation, decision makers fail to take account	external effects of their behavior
The demand curve for a good reflects	The value of that good to consumers, measured by the price that the marginal buyer is willing to pay
The supply curve for a good reflects	The cost of producing that good
In a free market	the price of a good brings supply and demand into balance in a way that maximizes total surplus
Total surplus	The difference between the consumers’ valuation of the good and the sellers’ cost of producing it
Internalizing an externality	Altering incentives so that people take account of the external effects of their actions.
Positive externality	The social value of the good is greater than the private value, and the optimal quantity will be greater than the quantity produced in the market
Negative externality	The social cost exceeds the private cost paid by producers
When an externality causes a market to reach an inefficient allocation of resources, the government can respond in two ways	1. Command-and-control policies regulate behavior directly. 2. Market-based policies provide incentives so that private decision makers will choose to solve the problem on their own
Command-and-Control Policies (Regulation) means externalities	Can be corrected by requiring or forbidding certain behaviors.
Externalities can be internalized through	The use of taxes and subsidies
Corrective tax	A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.
Coase theorem	The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.
Transaction costs	The costs that parties incur in the process of agreeing and following through on a bargain.
Excludability	The property of a good whereby a person can be prevented from using it
Rivalry in consumption	The property of a good whereby one person’s use diminishes other people’s use
Private goods	Goods that are both excludable and rival in consumption.
Public goods	Goods that are neither excludable nor rival in consumption
Common resources	Goods that are rival in consumption but not excludable.
Club goods	Goods that are excludable but not rival in consumption
Public goods and common resources each create	Externalities because they have, value yet have no price because they are not sold in the marketplace. These external effects imply that market outcomes will be inefficient in the absence of government involvement or private resolutions.
Free rider	A person who receives the benefit of a good but avoids paying for it.
Cost-benefit analysis	A study that compares the costs and benefits to society of providing a public good.
Tragedy of the Commons	A parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
The goal of a firm is to	Maximize profit.
Total revenue	The amount a firm receives for the sale of its output
Total revenue formula	Total Revenue = Price Quantity
Total cost	The market value of the inputs a firm uses in production
Profit	Total revenue minus total cost.
Opportunity cost	The cost of something is what you give up to get it
The costs of producing an item must include	all of the opportunity costs of inputs used in production (implicit and explicit)
explicit costs	input costs that require an outlay of money by the firm
implicit costs	Input costs that do not require an outlay of money by the firm
explicit costs	Input costs that require an outlay of money by the firm
The total cost of a business is	The sum of explicit costs and implicit costs
Economic profit	Total revenue minus total cost, including both explicit and implicit costs
Accounting profit	Total revenue minus total explicit cost
If implicit costs are greater than zero	Accounting profit will always exceed economic profit
Production function	The relationship between quantity of inputs used to make a good and the quantity of output of that good.
Marginal product	The increase in output that arises from an additional unit of input
Formula for marginal product of labor	change in output / change in labor
Diminishing marginal product	The property whereby the marginal product of an input declines as the quantity of the input increases.
Average total cost	Total cost divided by the quantity of output
Average fixed cost	Fixed costs divided by the quantity of output.
Average variable cost	Variable costs divided by the quantity of output.
marginal cost	the increase in total cost that arises from an extra unit of production
Marginal cost formula	change in total cost / change in output
Average total cost curve	U-shaped
Marginal Cost curve	Rising
Efficient scale	The quantity of output that minimizes average total cost
The Relationship between Marginal Cost and Average Total Cost	When marginal cost is less than atc, atc is falling, -When marginal cost is greater than atc, atc is rising. -The marginal-cost curve crosses the atc at minimum atc.
economies of scale	The property whereby long-run average total cost falls as the quantity of output increases
diseconomies of scale	the property whereby long-run average total cost rises as the quantity of output increases
constant returns to scale	the property whereby long-run average total cost stays the same as the quantity of output changes

Created by: KenzieMWallace105

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